Abbey mortgage launch shocks debt advisors

Abbey, the UK’s third largest mortgage lender, has received strong criticism for its launch of a new type of home loan that will provide funding of up to 125% of a property’s purchase price.

The loan, which is being offered to first-time buyers and others across the country in a pilot scheme, is entirely secured on the property but locks the borrower into negative equity, should they default.

Furthermore if property prices fall, as is predicted for some areas of the country in the coming 12 months, borrowers could see their negative equity escalate substantially.

Abbey has been accused of ignoring the Government’s call for a return to responsible lending and fuelling the national debt crisis.

The timing of the launch has shocked debt advisors, as the near collapse of Northern Rock has served to highlight concerns about irresponsible lending by banks.

Credit Action direct, Keith Tondeur, has warned that this type of loan embodies “real dangers” and believes that “someone taking on this loan would have to be incredibly bold or incredibly stupid”.

Under the terms of the loan a home buyer can borrow 100% of the value of the property they want to buy, plus another £25,000.

For example, a first-time buyer paying £100,000 for a home would be able to borrow £125,000, or 125% of the home’s value.

Someone purchasing a house for £150,000 would be able to borrow £175,000, or 116% of the value of the property.

On mortgages of less than £100,000, the total amount of the loan is worked out on a pro-rata basis.

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